Responsible managers and the question of competence

A change of control of an AFS licensee or credit licensee is not presently subject to approval by ASIC. The ASIC Enforcement Review Taskforce has recommended that this be addressed in its third Position and Consultation paper (the Position Paper), and has proposed that as part of that approval ASIC should assess whether the licensee remains “competent” to provide the financial services.

A question of competence or compliance

Under the existing licensing regimes, a licensee has an obligation to maintain organisational competence. This means the organisation must demonstrate it is competent by relying upon the knowledge and skills of the people who manage their business. These people are known as responsible managers. While ASIC checks compliance with this obligation at certain points, a change of control is not presently one of them – and it shouldn’t be.

ASIC requires AFS licensees to provide it with information when adding new responsible managers so it can assess their competency. Reassessing competence on a change of control is unnecessary, unless the responsible managers change, in which case ASIC would already reassess competency under the current regime.

Organisational competence under the credit regime

This is not the case under the credit regime, where ASIC has no oversight over whether an organisation meets its competency obligations. Licensees have the power to self-assess and are only required to notify ASIC if there is a change to Responsible Managers when they submit their annual compliance certificate. This means ASIC might not reassess organisational competence for as much as 12 months after the change. Therefore, to eliminate this risk, credit licensees should be required to notify responsible manager changes at the same time, and to the same level of detail, as AFS licensees. This would align the regimes and eliminate the need to assess competence on a change of control.

Alternatively, the AFS regime could be shifted to a self-assessment model like the credit regime, with assessment at change of control – but this is internally inconsistent. Why would a change of control necessarily justify an evaluation of the competency obligation, but not a change to the responsible managers upon whom the licensee relies for compliance?

This is because when there is a change of control the real issue is not whether the licensee is competent, it’s “whether the licensee remains likely to comply with its licence conditions and the financial services laws.”

The assessment of competence is quite narrow and only considers the experience and qualifications of the responsible managers (which may not change just because the controllers do). On the other hand, a licensee may rely heavily on group resources to comply with its obligations. If there is a change of control, they may not have access to these any more, which means they may no longer be able to comply with their licence obligations. This would be a more relevant concern for ASIC to assess at change of control.

Other competency concerns at change of control

While ASIC presently reviews responsible managers when they are added, there is generally limited review upon the removal of a responsible manager unless they are a key person. For example, a licensee with four responsible managers might remove two, neither of whom is subject to a key person condition. There could be very little review of this change, but if those two responsible managers are the only ones with particular experience, the licensee may no longer comply. This means new controllers of a licensee might remove responsible managers without it triggering a review from ASIC. There should be some consideration of the risk created by this exposure.

We would also suggest that responsible managers be given the power to notify their own removal from a licence, instead of leaving it for the licensee to do. Responsible managers are highly motivated to ensure records remain up-to-date, which would assist ASIC to remain aware of changes to responsible managers arising out of changes of control.

Jaime Lumsden Kelly is a solicitor director at The Fold Legal